lecture7 - Economics 310 Money Banking Lecture 7 University...

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Economics 310 Money & Banking University of Michigan Fall 2010 Lecture 7
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2 Lecture 1 Readings Determination of the Money Supply Chapter 14 Assignment A new assignment will be posted to the CTools site this afternoon
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3 Lecture 1 Where M = M1 money supply H = high-powered (or base) money r = required reserve ratio We conclude that We refer to the multiplicative factor 1/r as the simple deposit multiplier The Simple Deposit Multiplier Model H r M = 1
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4 Lecture 1 Problems with the Simple Deposit Multiplier Model Asserts that 1. banks hold no excess reserves 2. all borrowed funds are deposited into checking accounts Implication: only the Fed’s choices of reserve level and required reserve ratio will determine the money supply Reality: decisions of the banks and the public are important in the deposit creation process
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5 Lecture 1 Model of Money Supply Determination Develop a new model, based on the previous one Allows central bank to require reserves held to cover some proportion of deposits Allows banks to hold excess reserves Allows the general public to hold some of their wealth as currency M = m H H = base money (high powered money) m = “money multiplier”
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6 Lecture 1 Currency holdings for the public The public holds currency to facilitate some immediate transactions.
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